Monday, December 30, 2013

The Jobless Situation: getting better, but still quite bad.

Measured using official statistics, the job situation in the U.S. is getting better, but it's still pretty bad. This is especially true for young people and members of "minority" groups, but the problem is serious for the whole market too, where the availability of jobs is measured.

The statistics in the graph show the number of unemployed workers relative to the number of available job openings (both as measured by the Bureau of Labor Statistics). As shown by the dark black line with diamonds, the ratio of the official (U3) unemployment rate to the job vacancy rate has fallen relative to its peak at the end of the official recession in the middle of 2009. But this ratio is still high: there are more than two unemployed workers for each job that's available. This is about the same as the worst of the George W. Bush years (even before the Bush/Obama recession), when the availability of jobs was much more anemic than most people would like. This "worst" is shown by the black horizontal dashed line. The current ratio is clearly much worse than during the "good old days" of the Clinton years, when there was about one job for each unemployed worker seeking one. (That's when the BLS started collecting these data.)

Most people know that if an unemployed worker stops looking for a job, he or she stops being counted as officially "unemployed" and isn't part of the U3 unemployment rate. Luckily, the U.S. Bureau of Labor Statistics also calculates the U6 rate, which takes these folks -- including workers who quit searching for a job because the situation is so discouraging -- into account. The ratio of U6 to the number of job openings is shown by the purple line with the cross-marks. Looking at changes over time, the story is pretty much the same as for U3. One difference is that U.S. labor markets still haven't attained a low level that's comparable to the worst of he George W. Bush years (before the recession) which is shown by the horizontal purple dashed line. It's also hardly close to the ratio achieved at the end of Clinton years. Currently, using U6, there are about 5 unemployed workers for each vacancy counted (compared to 1.8 at the beginning of the graph).

The U.S. labor markets show a severe job shortage (with job openings being rarer than job seekers). This means that when the cut-off of unemployment insurance benefits to the long-term unemployed that's happening now shoves them to accept any damn job available (even if they're very overqualified), it will simply take jobs away from those with fewer qualifications. There will be little or no fall in unemployment as the desperate long-term unemployed shove those with short job tenure out of their jobs. (The "long-term unemployed" have been looking for jobs for more than one half of a year. Currently they represent about 37% of the unemployed labor force and about 2.6% of the total labor force.)
-- Jim Devine

Friday, December 27, 2013

Macro stuff from aan AD/AS dinosaur

Recently there has been a lot of attention given to the two equilibria that one gets from the interaction of a Fisher rule and a monetary policy rule in the presence of the zero bound. The typical depiction uses a diagram with the nominal interest rate on the vertical axis and inflation on the horizontal axis. I wanted to present the material to my students and thought it would go better if I translated the problem into AD-AS terms. In doing so, the issue of the comparative stability of the two equilibria - which has been debated- pops up in a somewhat new light - or so I think, but I'm probably wrong. Anyway, here's the example:

The monetary policy rule:   R = Rn + a(I - It), where R = the real interest rate, Rn is the natural rate, I is inflation and It is target inflation. The zero bound on the nominal interest rate, i,  entails the following:

i  = R + I = Rn + a(I - It) + I greater than 0 implies that I is greater than (a/(1+a)) It - Rn/(1+a)

I also have an IS relation : Y= 500 - 100*R, where Y is real output, and
                                         Y*= 800, where Y* is potential output

Now let a= 1/4, Rn = -3, and It = 4

AD ( in I, Y space) - or IS-MP, if you prefer, has the following characteristics:

At any inflation rate above 3.2 (which is where the zero bound starts to bind) AD is given by Y = 900-25*I
For inflation rates below 3.2, R = -I, so AD is Y= 500 + 100I, so it is negatively sloped above I= 3.2 and positively sloped below

AD thus looks like the nose-cone of a rocket pointing to the right, and intersects the vertical LRAS (Y=800) twice, at inflation rates of 4 and 3 on the negatively- sloped and positively-sloped segments, respectively.
When inflation is 4, the Fed sets the nominal rate at 1, giving a real rate of -3, consistent with Y at potential. When inflation is 3, the Fed sets the nominal rate at 0 (we've hit the lower bound ) and the real rate is again -3, the natural rate. (The inflation target cannot be met in this second equilibrium)

Now for stability. If we are at an inflation rate greater than 3.2, on the downward-sloping portion of AD,  with Y less than potential, all is well. Put in your (output) Phillips curves with expected inflation moving down when inflation is less than was expected and we make our way back to potential.

If we are at an inflation rate below 3.2 and to the left of potential, on the other hand, we have instability as long as the SRAS curves are flatter than the upward -sloping AD: we move further away from potential in a disinflationary spiral. If, on the other hand, the Phillips curves  are steeper than the AD curve, we may have stability, or cob-webbing or a stable orbit - depending on the details of the adaptive expectations process. If  expected I in t is actual I in t-1, for example, then we have stability in this case

Sunday, December 22, 2013

Postmodern Monetary Theory: The NSA and Unconventional Monetary Policy

On August 12, damaged by the revelations emanating from the leaked NSA documents by Edward Snowden, President Obama empaneled a commission to make recommendations for reforms of US cyber-surveillance.  On December 12 this group submitted its report, “Liberty and Security in a Changing World”.

One item that has attracted a bit of attention is a proposal, lodged in Recommendation 31, that reads as follows:
We recommend that the United States should support international norms or international agreements for specific measures that will increase confidence in the security of online communications. Among those measures to be considered are:  
(1) Governments should not use surveillance to steal industry secrets to advantage their domestic industry;  
(2) Governments should not use their offensive cyber capabilities to change the amounts held in financial accounts or otherwise manipulate the financial systems.....
This last item is interesting.  No documents have yet been released that suggest that the NSA or its foreign affiliates have altered financial accounts through electronic manipulation, but the commission presumably had access to a wide range of materials without knowledge of which will be made public in the future.  It may be the case, then, that they are acting to preempt a future revelation.  Even if there has actually been no such financial intervention, however, it is clear that there could be and that it would be prudent to consider the implications of such actions.

First, what sort of financial adjustments would authorities engage in?  It is unlikely that they would debit financial accounts, since affected parties would seek redress and, if their funds are not legally impaired, they would have a strong claim.  Crediting such accounts, on the other hand, is easily accomplished.  Recipients are unlikely to protest; on the contrary, they may be allied in some fashion with security authorities, perhaps providing some type of quid pro quo.  In that case, the alteration of financial accounts becomes of a form of monetary transfer, and it is this activity that economists may want to consider more closely.

What is the difference between the NSA or some other agency paying an external party (by check, suitcases full of cash, etc.) and crediting their account by hacking it?  Here are some of the possibilities:

1. A payment by intelligence authorities, even from a black account, is an expenditure charged to the treasury.  As such, it increases the fiscal deficit (or reduces the surplus) by a corresponding amount, which in turn alters the quantity of outstanding public debt.  To monetize this debt—to inject liquidity of equal amount so that the debt does not sop up existing liquidity—the central bank can expand its holdings equivalently.  (Saying this does not presume that the private sector cannot generate such liquidity on its own, only that monetary authorities may wish to do this under circumstances in which private credit creation is viewed as insufficient.)  Normally the treasury and the central bank are independent of one another, even if they do choose to coordinate.  In the case of credit creation by the NSA, however, payment and monetization are accomplished in the same act.  It is as if the central bank became the paymaster.  This is efficient if liquidity expansion is indeed the goal, but calls for some form of sterilization otherwise.  (Here the debiting of other accounts would be the simplest route if it could be accomplished.)

2. NSA payment through “direct deposit” is not a public expenditure and has no effect on public sector accounting.  Nevertheless it does affect national income accounts in the same way that traditional payments do: if it is payment for a counterflow of goods or services it should be incorporated into final demand, while if it is a transfer payment it alters the net tax calculation.  What is troublesome is the violation of double-entry accounting, since we now have flows into the accounts of some parties without flows out of the accounts of others.  It should be noted, however, that the application of double-entry bookkeeping to the issuance of currency is essentially pro forma, and that, in a fiat currency world, central banks do not take on any meaningful liabilities in this process.  Perhaps a fictitious liability can be designed for the NSA in order to enable the accounts to balance.

3. In the traditional practice of open market operations, central banks directly intervened only in the market for short term treasury debt.  Quantitative easing has changed this: now monetary authorities can select particular credit markets, public or private, to intervene in so as to alter the structure of interest rates.  NSA liquidity injections offer even more precise targeting at the level of individual market actors.  It is not difficult to imagine how this practice could be defended as the least-cost method of achieving narrowly defined goals in support of financial markets.  Of course, in a more roundabout manner, similar actor-targeted transfers were enacted globally in the post-2008 bailouts on a very large scale.

4. One striking feature of NSA financial capability is that it, like the virtual system it intervenes in, is borderless.  Thus, an agency of the US government can increase the stock of euros, yen, pounds, renminbi or any other currency as readily as it can inject US dollars.  It is easy to see how such a capability could be abused, and I can imagine that there may have been quiet discussions among the relevant authorities over this concern.  At the same time, however, this global capacity opens up a new chapter in international monetary policy coordination.  If, for instance, expansionary monetary policy in the US is inhibited by an unwillingness of the ECB to follow suit, explicit agreement can be circumvented.

5. The ability to intervene in any currency should also have a profound impact on the future likelihood of international monetary crises.  If there is a run on a country’s currency, that country can cause foreign exchange of any denomination to simply materialize.  Moreover, it no longer matters whether borrowing is undertaken in home or external currencies, since the borrower now has sovereign power over both.  For countries with the capacity to engage in NSA-type activities, the distinction between soft and hard currencies may be a thing of the past.

This is just a first pass at what ought to be a deeper investigation.  In the long history of money and credit, what is the significance of a public authority that can unilaterally alter the financial accounts of any market participant anywhere in the world it chooses?

Saturday, December 21, 2013

Losing It Over Obamacare

I know, I know.  That every GOP hack who wants to stay on Fox News and so on must relentlessly spout idiotic drivel about the old Heritage Foundation plan cooked up by Stuart Butler back in 1989 and supported by many Republicans, even being adopted successfully in MA by one Mitt Romney as governor, although all shifting into massive opposition when Obama came out for it in an effort to gain GOP support (hah!).  So, I should not waste my or anybody else's time pointing out the specific lies and stupidities emitted by any such "pundit."

However, I cannot resist in the case of Charles Krauthammer in the Washington Post of Dec. 20, 2013.  Yes, he is an old GOP Fox hack neocon, but partly due to the latter he occasionally shows signs of intelligence on domestic economic policies, even as on foreign policy he is AIPAC squared.  So, in his WaPo column he really shows the pathetic state of those trying to block the implementation of Obamacare (OK OK, "ACA").  It may be that I am using him to complain about a syndrome so entrenched that we do not even pay it any more mind. But the basis of its ongoing constant diatribes on this matter are becoming increasingly inane and absurd.  So, I shall pick this particular column apart.

He starts out with the legit complaint that Obama's claim that nobody would lose their insurance under Obamacare is the "lie of the year," but then goes off the deep end immediately afterwards with declaring that nobody knew "just how radical Obamacare is."  While it promised free mammograms (shocking!) and all kinds of things, it is in reality just a "full-scale federal takeover."  Really?  In fact, for all its supposed radicablism, after it the US will remain the only OECD nation not providing health care to all its citizens and also the only one besides Mexico with a system that is majority private sector, with the insurance companies making lots of money out of it, even as Krauthammer somehow thinks that they are going to be in deep doo doo that they deserve because they "colllaborated with the White House in concocting this scheme and now are being swallowed by it."  Yes, the evil federal government made them wait a whole month to start collecting premia from those who are not clear about their status with them in the new system, but this is not exactly the end of their profitability, and last time I checked they are mostly doing pretty well in terms of their stock valuations, shame on them!

The list of other false issues he repeats is long.  So, the exchanges must get young healthy people to sign up or it is doomed according to him, whereas all it needs is healthy people with not much gain from getting especially young ones.  Many millions will be dumped from their old plans and forced to get ones costing much more than those, whereas it looks like most who are losing their old insurance will get plans that are either better or cost less or both (not necessarily everybody).  Employers will be able to cancel their old plans, but gee, Charles, they have that right right now.  People will lose their doctors and their drug coverage, although so far the number of such cases looks pretty small.  And, oh dear, the HHS Secretary has the power to break the law to loosen some of the requirements to ease the transition!

Needless to say he has not a word to say about any of the good things that are arriving with the plan.  These include the ending of people being turned down for preexisting conditions, perhaps its greatest virtue, the allowing parents to have their children covered until they are 27, and that many people are getting insurance who never had it, even if the SCOTUS ruling has allowed states to reject the Medicaid expansion portion of the act, which may be its greatest benefit overall.

In the end we may have the situation politically that was there when the act was passed so long ago: people like the specific provisions of the law when they are asked about them, but are more negative than positive when asked about what they think of "Obamacare."  Krauthammer joins the ongoing nonstop tirade in certain circles against it, apparently the main GOP theme for next fall's election campaign.  But, while there will doubtless be another round of people being dumped from their plans after New Year's who can show up on Fox for at least another month to complain, some of them legitimately even, the evidence of new outrages is going to get very thin not too long after that, and those ranting like Krauthammer will find themselves having to struggle ever harder and more tendentiously to provide any sort of credible critique of the new program, even if many of us know that the alternative (single payer) it was originally cooked up to hold off would probably be better.

Barkley Rosser

Friday, December 20, 2013

John Cochrane on the 1982 Fiscal Restraint ???

Has John Cochrane fallen off the cliff again with:
What if we got the sign wrong on monetary policy?
He is motivated by post from Stephen Williamson on Phillips curves and monetary policy that starts off sensibly enough. Even this die hard believer that Keynes had a point is willing to concede that Milton Friedman got a lot of things right. Williamson is even willing to note this:
If we think there is an episode where monetary factors were important, then we should see the Phillips curve over that period, as monetary shocks tend to move inflation and the unemployment rate in opposite directions in the short run. So, consider the period of time between fourth quarter 1980 and third quarter 1982, when Paul Volcker was using monetary policy to bring the rate of inflation down.
Williamson later notes what Irving Fisher taught us about the effect on nominal interest rates in the long-run:
So, over the long run, there's a clear positive correlation between the nominal fed funds rate and the pce inflation rate. Irving Fisher taught us that, in credit markets, borrowers and lenders care about real rates of return. Thus, there should be an inflation premium built into the observed nominal interest rate - if the inflation rate is higher, the nominal interest rate should be higher. This just compensates lenders for the decline in purchasing power they experience between the time a loan is extended and when it is paid back. Indeed, some mainstream models, including New Keynesian models (which are basically neoclassical growth models with sticky prices and wages) have the feature that the long-run real interest rate is a constant, determined by the subjective rate of time preference of the people who live in the model.
All of this seems fine until Williamson starts musing over this:
So, suppose I am Paul Volcker, and I'm faced with a situation at point A where the inflation rate is high and the nominal interest rate is high. The curve SRLE1 is the short-run tradeoff I face. I can reduce inflation in the short run by increasing the nominal interest rate, thus moving to B. But that won't work to reduce inflation in the long run, so after increasing the nominal interest rate, I have to begin reducing it.
At this point one might be best advised to stop reading as we old timers would cut in and say that the prolonged large out gap during the 1980’s was what was responsible for the dramatic reductions in inflation, which sort of became a semi-permanent feature of the US economy. But silly me had to read Cochrane’s take on this which included:
To be sure, I left the grand Volcker stabilization out of the picture here, where a sharp spike in interest rates preceded the sudden end of inflation. And to be sure, there is a standard story to explain negative causation with positive correlation. But there are other stories too -- the US embarked on a joint fiscal-monetary stabilization in 1982, then under the shadow of an implicit inflation target gradually lowered inflation and interest rates.
Did Cochrane and I live on different planets some 30 plus years ago? My recollection was that Reagan’s fiscal policy was quite stimulative working contrary to Voclker’s tight monetary policy. Which is why real interest rates during the 1980’s shot up dramatically and stayed high even as inflation and nominal interest rates fell. Yea – there are “other stories too”. Stories that don’t fit the reality of the period.

Thursday, December 19, 2013

Bullard Leads The Fed

Janet Yellen may be about to replace Ben Bernanke as Fed Chair, but the decisionmaker there who seems to be calling what will be happening in the future is St. Louis Fed President, Jim Bullard.  After the initial foray to talk about tapering in May, he dissented at the June meeting on the dovish side, despite being prez of one of the traditionallhy most monetarist Feds.  He argued that they needed more data supporting an end to the taper to go for it, particularly on the inflation side. In September the FOMC surprised the markets by essentially following Bullard's advice, pulling back from a taper and declaring that more data was needed to support a taper.

Now he has done it again.  At the meeting concluded yesterday, the Fed announced a "tiny taper," cutting securities purchases from $85 billion per month to $75 billion per month.  Who was the first to publicly call for such a move?  Yep, Jim Bullard, on December 9 in a public statement, indeed, using the term "tiny taper" for what he thought they should do, and now they have done it.

So, things may change with the leadership transition, but anybody wanting to watch what the Fed is likely to do in the near future is advised to keep an eye on the public statements by Bullard.

Barkley Rosser

Tuesday, December 17, 2013

Taxes And Income Distribution: The Way It Was And The Way It Is

Got invited on to the local TV station today to discuss income distribution thanks to the recent statements about the matter by President Obama and Pope Francis, only to upset the local anchorman by telling him things he had not known previously, such as the shocking fact that someone making $115,000 per year pays the same in fica/Social Security taxes as someone making $115 million per year, although, well, that must be just fine because "that is the way it has always been, right?"  As it was I advocated raising the income cap on fica and taxing capital gains as income, just as was put into place back in 1986 under Ronald Reagan.  In the very conservative Shenandoah Valley this is how one must pose such radical proposals.

But, it got me to thinking about what I should have said, particularly if I had more time, which one rarely has on TV, especially local TV.  So, when the anchorman, who really is reasonably smart and well-intentioned, asked me if it had always been this way, that people above a certain income level (really, wage and salary level) pay no more in fica taxes than those at that level, I should have reminded him of how things used to be.  Yes, that is the way it has always been, but in other areas of the tax code, things have changed so as to really help out those at the top end of the income hierarchy, even if they have not been made to pay their fair share for our rising Social Security expenditures (and I noted that if one raised the income cap and was revenue neutral, one could cut the overall rate, thus lowering taxes for the bottom 96% of the income distribution, sort of like how closing loopholes back in 1986, such as the special break for capital gains, allowed a general cut in income tax rates for Mr. Reagan).

In particular I should have mentioned that from 1940 to 1965 we had a top marginal federal income tax rate that exceeded 90% in the U.S., which has since been drastically lowered.  Since 1986 that rate has not exceeded 40%, but somehow the economy grew more rapidly and produced more jobs during that earlier period than it has since that top rate was so sharply reduced.  In discussing the reintroduction of the special treatment of capital gains income under Bush, Jr., I noted that it was supposedly justified by the top 1/10 of 1% of the income distribution, who have gotten something like a third of the income increases since 2009, being those who would provide jobs for the rest of our society.  I asked perhaps a bit too sarcastically, "Where are those jobs?  They sure are not doing a good job of providing them," which brought a vigorous nod and chuckle from the crusty weatherman who was standing nearby.  Uh oh, now I am in deep doo doo, with a storm brewing.

What really strikes me is how successfully this very upper sliver has been able so to cow the media that one never hears these sorts of facts discussed.  We hear repeatedly about how "47% do not pay federal income taxes," but nobody talks about how fica taxes simply do not increase at all above a certain cutoff.  Occasionally someone will mention the special treatment of capital gains, but this is quickly dismissed because of the need to keep those "job creators" happy.  It is a hard fact that the group that pays the highest percentage of their income in taxes overall is actually around the 96-98 percentile, with that percentage falling steadily and firmly as income rises above that, because of the limit on fica taxes and the higher percentage of income earned as capital gains and also the regressive nature of sales taxes, the largest source of revenue for state governments nationwide, another point almost never discussed, except for in GOP states where they want to shift more to those sales taxes and away from income taxes so that those job creators will get helped more.

My bottom line was to say that I did not support "confiscatory taxation of the rich," but that I simply wanted to see them pay some of the same rates that others pay.  That seems fair, doesn't it?  But this is shocking, shocking, in today's environment.

Barkley Rosser

Robert Samuelson Whines About Muddling Through

Oh, I cannot resist piling on, even though good old Dean Baker has already pretty much done the dirty job of once again showing how misguided and fixated on silly things Robert J. Samuelson is with his latest column in the Washington Post, 12/16/13, "The luxury of muddling through," although my effort to link to Dean's excellent post does not seem to be working.  In any case, the abysmal RJS complains that the latest budget deal is just "muddling through" and does not deal with "the central issue" of longer term deficits, which he sees as mostly a matter of not cutting retiree benefits, although he does note that Republicans do not wish to raise taxes, which he seems to accept as an unbudgeable given.  He does not note that this new budget cuts unemployment insurance and food stamps (SNAP), even as he whines about this muddling through. While this budget clearly "sucks," as Nancy Pelosi put it, at least it does mean that we are not likely to have a government shutdown or debt ceiling crisis for the next two years (although debt ceiling crisis is not completely off the table).

Dean accurately points out that RJS makes no allowance for the collapse in revenues due to the Great Recession and how our failure to get back to where we were is the main reason for the deficit.  He also  notes that for all RJS's whining about Medicare costs, he does not even mention once that the cost curve on medical care costs has been bent.  In all this RJS continues to follow the line of WaPo editorial page editor, Fred Hiatt, that cutting Social Security and Medicare is this very high priority that must be done ASAP, a line that many other WaPo columnists who are nominally liberal  Dems such as Ruth Marcus also spout.  Dean also argues that if SS and Medicare really were to get into serious trouble in the future, voters would probably support tax increases to support these popular programs.  Polls show even Republicans supporting such tax increases for these programs.

Let me just add a few more points to this drubbing that Dean missed.  One is that in fact the deficit has come down substantially over the last few years.  It is simply not in any dangerous state that would lead to the sort of crisis that RJS suggests in the column may be coming if muddling through is all that happens.  Furthermore, as Dean has noted in the past, but did not this time, the real measure of the burden of the debt is the interest payments on it measured as a percent of GDP.  That percentage is now only half of what it was 20 years ago.  We are simply nowhere near any sort of crisis point on all this.

What continues to be annoying about RJS, besides his fixation on wanting to cut these programs, is how ignorant he is of economics, although somehow he has been given this position of being the main regular economics columnist of WaPo.  This is best seen in the horror that he expresses in this column that the likely outcome of this budget is that "the current [upward] trajectory of the debt would not change."  Really.  Somehow he seems unaware that in the vast majority of years in US history we have run federal budget deficits, which means that the debt has risen in most years without any fiscal catastrophe ever happening.

Since WW II, there have been only a handful of years when the budget has run a surplus, most recently at the end of the 1990s, with that reflecting both rapid GDP growth and the tax increase Clinton put through in 1993, unsupported by even one Republican who loudly forecast imminent recession whereas instead we had rapid GDP growth, which brought us those surpluses, just as our current low GDP and growth is the main source of our current deficit.  There is simply no reason to aim at budget surpluses as a policy goal.  Again, it is the ratio of the debt to GDP that matters, and more importantly the ratio of the interest payments to the GDP that matter even more, and those are very far from what they were even quite recently when they did not trigger any sort of crisis.   Robert J. Samuelson's whining is simply completely out of touch with reality, but at least he is unlikely to lose his job at WaPo as long as the current editorial page editor continues to have his.

Barkley Rosser

Wednesday, December 11, 2013

Persistently High Long-Term Unemployment Rates.

In case you were wondering about how bad the U.S. job situation is, here's estimates of the unemployment rate for those who have been jobless (but still seeking jobs) for more than a half of a year, as a percentage of the total civilian labor force. The labor force is the total number of workers who are willing and able to work, as indicated by their either having jobs or actively seeking them. Even though the numbers are down in recent years compared to at the end of the "Great Recession," they are still much higher than during previous recessions in the U.S. (indicated by the vertical gray lines). -- Jim Devine

Sunday, December 1, 2013

Website for Nonlinear Economic Dynamics Society (NEDS)

I want to announce that the Nonlinear Economic Dynamics Society (NEDS) that I founded some years ago now has a website at NEDS, folks.

Barkley Rosser

Being an Economist Means Not Having to Have Any Actual Knowledge of What You’re Talking About, Exhibit 37: Occupational Safety and Health

Robert Frank’s column in this morning’s New York Times is about the economics of occupational safety and health, or more precisely, about Robert Frank’s one obsession with economic theory, invidious comparisons of well-being.  Frank has gone totally hedgehog over the tendency to evaluate one’s condition in relation to others; it has been the subject of virtually all of his writing for the past decade or so.  To better highlight this one wrinkle, he has embraced the most orthodox of orthodoxies in every other respect, which means that his treatment of policy topics has become little more than an exercise in deduction from axiomatic principles.

To see what I mean, take a look at this latest piece on “the price of danger”.  Here is his summary of the issue as seen through the lens of economic theory:
Consider the familiar trade-off between wages and workplace safety. Because safety devices are expensive, additional safety means lower wages. Reducing risk to zero is impossible, so the practical question must always be this: How much safety is enough? Since Adam Smith’s day, classical economic theory has held that well-informed workers in competitive markets will navigate this trade-off sensibly. They will accept additional risk in return for higher pay only if the satisfaction resulting from their additional buying power is greater than the corresponding loss in satisfaction from reduced safety. Regulations that mandate higher safety levels make workers worse off by forcing them to buy safety they value at less than its cost.
Of course, as Frank notes, workers have clamored for safety regulation, and some degree of standard-setting and monitoring is universal in industrialized countries.  Hence the theory must be wrong.  Why?  The answer is—surprise!—the tendency to evaluate our well-being in relation to others.  Income is a rat race, so trading off risk against income makes workers worse off.  And that’s it—end of story.

Does it matter that every single point that Frank raises is contradicted by the evidence?  He apparently doesn’t care, since evidence doesn’t get any space.  Having a clever idea is enough.  If Frank were the only economist with this frame of mind, we could safely ignore him; alas, he has a lot of company.  Pick up any economics textbook and you will find sweeping judgments about all sorts of issues of law and policy based entirely on deductive theory, without any consideration of the history of the topic or factual details that people on the ground have regarded as important.  (Exhibit 1 would have to be rent control.)

So let’s make a list of some of the things that people who study occupational safety and health know and Frank omits from his analysis:

1. Safety is expensive, but so are accidents.  There is an enormous literature that documents that firms frequently fail to take measures on their own initiative to prevent accidents even though they would pass a cost-benefit test.  Not all such measures would pass, but many would.

2. Adam Smith’s theory of compensating wage differentials was highly disputed during the nineteenth and twentieth centuries.  John Stuart Mill believed that, in times of involuntary unemployment, higher risk would be accompanied by lower wages—the sweatshop effect.  The institutional economists identified with legal realism in the early twentieth century agreed.  True, there was a period of theoretical monoculture in economics during the 1970s to 1990s in which compensating differentials became the hegemonic view, but that perspective declined with changes in labor market analysis post-1990 or so.  Take a look, for instance at Labor Economics, the graduate textbook by Cahuc and Zylbergerg; their skepticism toward the model that Frank identifies with “economic theory” is palpable.

3. Frank simply assumes that wage bargains are not affected by the prior allocation of rights—that it makes no difference whether workers have no right to safe jobs and must give up wage demands to get them, or whether they do have this right and have to be bribed with hazard pay to accept greater risk.  Of course, in the real world willingness to pay and to accept are vastly different, and workers understandably want all sorts of mandated job rights, beginning with health and safety.  To be effective, such rights have to be codified and enforced.  I have not made up this point; you can find it in legal reasoning during the period at the turn of the twentieth century when courts began to find in favor of injured workers.  (My source for this was Atiyah’s Rise and Fall of Freedom of Contract.)

4. Wage compensation for risk will be incomplete if the threat of dismissal is used to control worker effort, the so-called efficiency wage approach to wage-setting.

5. The literature on the behavioral aspects of risk perception and response is a thick stew.  Workers tend to respond asymmetrically to safety norms, as suggested by prospect theory.  They often retreat into denial of unpleasant truths about the risks they face, as suggested by cognitive dissonance theory.  Workers are human beings, not cost-benefit machines.

6. The empirical record for compensating wage differentials, despite what its proponents (like Kip Viscusi) claim, is mixed at best.  Positive coefficients on occupational risk in wage-risk regressions depend on the choice of control variables; they show up in some subsamples, such as unionized workers, and not others.  They are different for white workers compared to black, men compared to women, and these differences fluctuate from one sample to the next.

But why get bogged down in all this detail, specific to the economics of occupational risks, when the point is to show how you can solve the world’s problems with a single, all-purpose axiomatic model?

Friday, November 29, 2013

How To Depoliticize The Fed

I must congratulate Heritage Action on their principled move to "score" votes of US Senators on the confirmation of Janet Yellen to become Chair of the Board of Governors of the US Federal Reserve System.  They are doing this in order to register their protest against the "politicization" of the Fed and to fight against it.  Surely, there is no better way to depoliticize the Fed than to threaten any Senator (particularly a GOP one) with facing a well-funded teabag opponent in a primary if they dare to vote for the appointment of Yellen.  I must applaud Heritage Action on its sagacity and wisdom in this move (hack, cough)...

Barkley Rosser

Tuesday, November 26, 2013

Bibi And GOP Whine While Stock Market and Spooks Love Iran Nuke Deal

Yesterday the Wall Street Journal top headline told us that there was much opposition to the Iran nuclear deal that Sec. State John Kerry has pulled off with Iran and the P5+1 in Geneva.  Israeli PM Bibi Netanyahu is loudly denouncing it as a horrible mistake, and many Republkicans in Congress are joining in with his denunciation, despite 2 to 1 public opinion poll support in the US.

However, it looks like Bibi is out of step with some important opinion makers in Israel itself on this matter, who seem to view the matter in a much more favorable light.  One is the Israeli stock market, reaching new highs in the wake of the agreement, and more silently but there nevertheless, the Israeli military-intelligence security establishment, whom Bibi likes to ignore in order to enflame his political backers and undercut Obama, whom he is very annoyed he failed to have Romney defeat last year in the US election, darn it!

Sorry.  Bad links; for the second one, try .  The one I linked to is Stratfor that does not get it and still thinks the Saudis are upset. They are not.  For the first one, there are lots of sources out there about the Israeli stock market booming on the news.

Barkley Rosser

Monday, November 25, 2013

Dean Baker v. Greg Mankiw on Wage Inflation

I may have been too nice to Greg Mankiw per something Dean Baker notes with support from Paul Krugman. Dean notes:
if we use the broader measure of wage growth for all workers, we don't see any evidence of acceleration at all. Wage growth has been hovering around 2.0 percent for the last two and a half years. It had been somewhat lower in 2010 (@ 1.6 percent), but there certainly is no upward pattern in this series.
Paul adds:
One of these numbers, wages of production and nonsupervisory workers, shows a modest uptick, the others not. All three remain well below their pre-crisis rates of increase. Is this the kind of evidence on which you want to base a major policy change? Not in my world.
Whether we examine the growth in average hourly earnings for production and nonsupervisory workers, the growth in average hourly earnings for all employees, or the employment cost index, wages seem to be rising by only 2% per year. If this increase in nominal wages is matched by an increase in productivity, one would think that unit labor costs would not be rising. The Bureau of Labor Statistics publishes the change in unit labor costs on a national basis every quarter. Unit labor costs actually fell by 3.7% in 2010 and have barely increased since. Call me old school – but why are we worried about a modest increase in nominal wages when unit labor costs are basically flat?

Sunday, November 24, 2013

Former Romney Economic Advisors on the State of the Labor Market

While the Washington Republican leaders keep pushing austerity and complain about the Federal Reserve pursuing expansionary monetary policy, it is refreshing to see what Greg Mankiw is saying about the choices Janet Yellen will have to face:
In her recent testimony before the Senate Banking Committee, Janet L. Yellen, the eminently qualified nominee to lead the Fed, made clear she didn’t think the time for an exit had come. With inflation running below the Fed target of 2 percent and continued weakness in the labor market, she argued, the economy needs all the help the central bank can provide. Many of the numbers back up that diagnosis.
Mankiw note only cites the continuing high unemployment rate but also the low employment to population rate. Yet, Mankiw did note some contrary evidence:
Seven years ago, the vacancy rate was a bit over 3 percent. It fell to a low of 1.6 percent in July 2009, a month after the official trough of the recession. The most recent reading puts it at 2.8 percent. So according to this measure of labor-market tightness, the economy is almost back to normal. Data on wage inflation also suggest that the labor market has firmed up. Over the past year, average hourly earnings of production and nonsupervisory employees grew 2.2 percent, compared with 1.3 percent in the previous 12 months. Accelerating wage growth is not the sign of a deeply depressed labor market.
John Taylor, however, thinks the labor market is still incredibly weak:
Research by Christopher Erceg and Andrew Levin is providing solid evidence that the decline in the labor force participation rate since 2007 has been due to cyclical factors–the recession and slow recovery–rather than to demographic factors. In other words, the fact that such a large number of people have dropped out of the labor force is associated with the weak economy rather than to their reaching their retirement years–or some other typical demographic trend. Because the unemployment rate does not count the people who dropped out of the labor force it no longer gives a good reading of the state of the labor market. The unemployment rate would be much higher without this large decline in labor force participation.
Taylor shows the Erceg-Levin chart with unemployment adjusted for a “normal” labor force participation rate, which suggests an adjusted rate near 11%. He concludes:
There is no longer debate that the labor market performance in this recovery–and the recovery itself–is unusually weak. The debate is now over why. I have argued that it is the economic policy.
This is all fine but he didn’t say what economic policy should be doing. Does he still believe that Quantitative Easing should have been discontinued three years ago?

Friday, November 22, 2013

Minimum Wages and Macroeconomic Silliness

Mark Perry has a silly argument against raising the minimum wage, which thankfully David Cooper has ably addressed. The gist of Perry’s argument is captured by his title:
In Western Europe, the average jobless rate is twice as high in countries with a minimum wage vs. those with no minimum
Cooper replies:
First of all, as we learned in Statistics 101, there’s a difference between correlation and causation. Even if there appeared to be some pattern between minimum wages and unemployment, that wouldn’t mean that one is in any way causing the other. The only way to try to identify causality is to isolate as many—ideally all—other factors that might play a role in the suspected relationship through statistical regression methods … take a look at the countries that do have minimum wages. If minimum wage laws do lead to higher joblessness, as Perry suggests, one would expect that the higher the minimum wage, the higher the jobless rate. According to this table, that’s not the case in Western Europe. The figure below is a simple scatterplot of the minimum wage rates and the jobless rates from the table. As you can see, under the superficial approach that Dr. Perry is viewing these data, higher minimum wages actually imply lower jobless rates.
Note that Greece’s minimum wage is quite low and it has a 27.2% unemployment rate. On the other hand, Luxembourg has a very high minimum wage but its unemployment is quite modest. If we are playing this game, we could also look at the real minimum wage in the U.S. over time comparing it to our unemployment rate. After all – the real minimum wage peaked in 1968, which was also a year where the unemployment rate dropped to 3.4%. David Cooper is not suggesting that higher minimum wages tend to lower unemployment rate, but we are saying that Dr. Perry’s little exercise is silly.

Thursday, November 21, 2013

Taylor Rule Follow-up: Core CPI Is Not Biased

Paul Krugman made a valuable contribution on measuring inflation in light of my post on the latest from John Taylor:
Or at least it seems to be a new rule — namely, pick whatever price index makes the point you want, even if it’s not at all the price index you would normally use … Um, the inflation rate for the “GDP price index”? That’s the GDP deflator, which the Fed very carefully does not use as a policy indicator. Why? Because it contains things like grain and oil prices, which fluctuate a lot, so that it’s an unstable measure that is highly unreliable as an indicator of underlying inflation. The Fed prefers the consumption deflator excluding food and energy.
Taylor has a heated reply but alas it is all heat and no light:
Rather than taking out food and energy price inflation I controlled for price volatility in that rule by averaging overall inflation over time. Simply taking out food and energy price inflation can lead to policy errors especially when such inflation lasts for more than a short time. And it is not only the overall GDP price level. The CPI inflation rate was also rising, not falling, during this period. In any case, the increase rather than a decrease in overall inflation was only one part of my assessment that this was not a slack period. I also discussed the unemployment rate—which got quite low (4.4%) rather than high as in slack periods—and the huge housing boom with high housing price inflation.
OK – inflation rose but only slightly. A 4.4% unemployment rate was certainly not low in comparison to what we witnessed in the late 1990’s. And it is odd that Dr. Taylor refused to acknowledge my point that the FED had already been increasing interest rates before the labor market got moderately over the Bush recession. As far as the housing boom – which President Bush used to brag about – a lot of the blame should go to unwise financial market deregulation – but I guess it would be political suicide for a Republican economist to acknowledge that. In my view, Krugman reader JCB had a more interesting – albeit invalid (as I will explain) – set of comments:
Does eliminating the most volatile categories of consumer expenditure such as food, energy, and home prices from the calculation of the year-on-year rate of inflation make it possible to ignore them as important elements of the long term standard of living? I mean, why tacitly assume that the most volatile prices will sum to zero in the long run? ... The cumulative divergence between all-consumer prices and "underlying inflation" increases between 2000-2013
JCB provided us with his evidence, which was a chart showing how core CPI rose by a cumulative amount of 32% over the 2000 to 2013 period whereas CPI (including food and energy) rose by a cumulative amount of 38% during this same period. This period has often been described as the great commodities boom as noted by Pedro Conceição and Heloisa Marone:
The trough, since when the 21st century boom started, took place in late 2001. In real terms (using the US CPI to deflate the nominal price series), the boom remains impressive, with indices more than doubling in real terms. However, real prices were still below the average prices of the 1970s and earlier decades (Figure 2).
If one compared core CPI to overall CPI for the period from 1979 to 2001, core CPI rose faster than the overall consumer price index. Over the entire period, both series have increased by about 228%. If JCB was trying to suggest a long-term bias in the use of core CPI, I don’t see it. Rather – I just see more volatility in the use of an index that includes food and energy prices.

Monday, November 18, 2013

John Taylor on Monetary Policy and Inflation

If you were expecting John Taylor to address what Barry Ritholtz noted about that 2010 prediction of inflation, stop holding your breath. Taylor instead tried a rebuttal to the latest from Lawrence Summers. Taylor’s summary of Summer’s argument starts with this:
In the years before the crisis and recession, easy money and related regulatory policies should have shown up in demand pressures, rising inflation, and boom-like conditions. But the economy failed to overheat and there was significant slack.
Taylor of late has been saying that our current mess was created by a deviation from the Taylor rule. Here’s his evidence:
Inflation was not steady or falling during the easy money period from 2003-2005. It was rising. During the years from 2003 to 2005, when Fed’s interest rate was too low, the inflation rate for the GDP price index doubled from 1.7% to 3.4% per year. On top of that there was an extraordinary inflation and boom in the housing market as demand for homes skyrocketed and home price inflation took off, exacerbated by the low interest rate and regulatory policy. Finally, the unemployment rate got as low as 4.4% well below the natural rate, not a sign of slack.
Wow – hyperinflation! No one during the Bush Administration – its advisors (which included Taylor) nor its critics – were saying back then that the employment to population ratio had become dangerously high. The 4.4% unemployment rate – which corresponds to a 63.4% employment to population ratio – was not reached until late 2006. By then, we had seen two years of rising short-term interest rates. Now had Taylor and his fellow Bush economic advisors were very concerned about excessive aggregate demand – why did we not seen calls for fiscal restraint back then? If Taylor thinks this is a serious rebuttal to what Summers said, it is no surprise he has yet to acknowledge that 2010 forecast of inflation from QE.

Saturday, November 16, 2013

The Consol Solution To The Debt Ceiling Crisis

Yeah, I know.  It is not currently a crisis.  That is Obamacare, blah blah blah.  But that website will get fixed and those who lost their crappy insurance policies will get them extended, blah blah blah.  The remaining serious crisis that could still plunge the world economy into a massive economic plunge, even with the very wise and capable Janet Yellen at the helm of the US Fed, would be a US default on its debt following a failure to raise the debt ceiling in time, with the most likely scenario for this being increasingly delusional Congressional GOPsters out to destroy the economy so they can get elected blaming it all on socialist Obamacare, blah blah blah.  Probably wise heads, or at least not completely delusional ones, will prevail, but the fury and delusions in the weird sub-media bubble of the teabags seems to be intensifying.

Now quite a few of us, including such folks as Bill Clinton, Bruce Bartlett, me, and a lot of others, have said that how Barack Obama should deal with this once and for all for all future presidents and the US and world economies, is to declare this motherfucker of a debt ceiling unconstitutional, which it is, even if a GOP dominated SCOTUS might disagree.  But one of them might realize the threat and support reason on it, if faced with the prospect of a massive global economic collapse as bad as anything ever seen.  In any case, Obama has not followed our advice, and given that he pulled off the latest crisis with only the most minor of market blips may be making him complacent, as well as his enemies, who likewise given the lack of market fear (for once ratex worked; they forecast the ceiling would be raised and it was), may not be held back and may take us over the brink.  It is much more likely than most today think.

So, in yesterday's (Nov. 15) Washington Post in its Friday forum, there is an innovative and interesting column on this issue by James Leitner and Ian Shapiro, "A new tool to avert a debt crisis," and I completely agree with them and wish to publicize this alternative tool to those that Obama has rejected (there is also the goofy trillion dollar platinum coin alternative, which both the Treasury and Fed have publicly declared they will not go along with).  This solution is to issue consols if the Congress foolishly refuses to raise the debt ceiling in the nest round of this silliness coming up early next year.

The column taught me things I did not know.  The term "consol" is short for "consolidated," and sometime in the 1700s the UK consolidated a bunch of long-term bonds. Then in the 1800s they began to issue the actual consols, bonds with infinite maturity, public "annuities" if you will.  They just pay interest forever.  Quite a few were issued in the heyday of British domination of the world economy in the Pax Brittanica of 1815-1914.  Some were retired, but according to Leitner and Shapiro some still exist in the UK government portfolio, still paying their interest.  Of course in fin econ textbooks they are the real world example for that nice simple back of the envelope formula that is also relevant for real estate that says that PV = NR/r, where PV is present value, NR is a constant real net return forever, and r is the real interest rate or discount rate for this most basic of present value calculations.

Anyway, Leitner and Shapiro point out a curious detail of how the US legally measures the national debt: only bonds with finite maturities add to it.  So, if the debt ceiling is hit, the US Treasury could issue consols that will not legally add to the national debt.  The US Treasury will be able to continue to borrow money and pay bills and avoid defaulting while not legally adding to the national debt.

OK OK, there is a dark side, and I give them credit for recognizing it.  These consols may require higher interest rates than other US government securities, in violation of the usual pattern that longer term securities provide lower yields.  They suggest that if Obama is forced to issue these at higher than usual interest rates he publicize how much these are costing taxpayers and blame it publicly and loudly on the reprobate Congresstrolls.  The only further thing they suggest is that the Treasury get at issuing a few soon to get a target interest rate and prepare everybody.  I completely agree.

Monday, November 11, 2013

State & LocalAusterity – Is Christie Doing His Job?

Caitlin MacNeal must have watched Chris Christie yesterday too:
New Jersey Gov. Chris Christie (R) went on four morning talk shows on Sunday to tout his sweeping re-election victory as a model for the Republican Party nationwide, but the prospective 2016 presidential contender carefully refrained from staking a position on contentious issues such as immigration reform and deliberations over Iran's nuclear program. Throughout the morning, Christie left the door open for a 2016 presidential run while making it clear that governing New Jersey is his focus right now.
Christie has also been talking tough about doing his job and being honest with citizens. I’m happy to focus on New Jersey issues but first let me express my only frustration ever with the excellent posts from Bill McBride who suggests state & local austerity is over:
Now state and local governments have added to GDP for two consecutive quarters, and I expect state and local governments to continue to make small positive contributions to GDP going forward.
State and local government purchases have inched up for the past two quarters but only after a sustained period of decline. To be fair to Bill – his graph of government employment dates back for over a decade showing how deep the state and local government austerity has been. Governor Christie campaigned very dishonestly on the claim that he balanced the budget and had incredible employment growth. In truth, the New Jersey employment record sort of tracked the national record. At the end of 2007, employment was 4.3 million but dropped to 4.1 million by mid-2009. Its recovery has brought this figure only back to 4.2 million as of August 2013. In other words, employment is still 2.3% shy of where it was before the Great Recession. Nationally, employment is only 1.1% shy of where it was before the Great Recession. I say “only” here but you might protest that employment would have had to grow by almost 5.7% in order to get back to the old employment to population ratio. Christie was asked about this point from the Wall Street Journal:
Among the headwinds for the Republican as he sets an agenda for 2014: a state unemployment rate of 8.5% in August, compared with 7.3% nationally (and among the 10 highest of all states); a slower recovery from the recession compared with the nation; and a budget with a slimmer surplus than those in most of the rest of the country.
One of his responses was that New Jersey has created 144,000 new private sector jobs. Of course, that figure used as its starting point the bottom of the employment decline. But then how can I claim that total employment rose by only 100,000 new jobs since the bottom? Could it be that government employment was reduced by around 40,000 during Christie’s tenure in office? In other words, Christie sees his job as fiscal austerity which only makes the employment situation worse. And yet he brags about how he has somehow improved New Jersey’s employment situation? I guess the press thinks this is honest because Christie shouts when he says this nonsense.

Sunday, November 10, 2013

Job Market Doldrums Continue

On this last Friday (11/8), the Bureau of Labor Statistics of the U.S. Department of Labor released its newest number on conditions in labor markets. The number that got the most attention was the growth of employment. To quote their website, “Total nonfarm payroll employment rose by 204,000 in October, and the unemployment rate [U3] was little changed at 7.3 percent...” (The full report is at

The news of 204 thousand extra jobs should be treated carefully. Nobody should be excited (assuming, of course, that anything in economics can be exciting). What really demands our attention is the changes that occur from year to year. After all, month-to-month numbers can involve all sorts of temporary changes that indicate nothing about the trend. So looking at the increase in employment from October 2012 to October 2013, the number is 194 thousand per month, which is slightly less exciting than 204 thousand.

More importantly, even though by this measure job creation has been rising since early 2013, the October-to-October increase in hiring was significantly slower than what we saw in early 2012. Job creation may catch up with what happened then, but when the demand for products is growing slowly that also means bad conditions for job-seekers. (According to the Bureau of Economic Analysis of the U.S. Department of Commerce, real GDP grew only 2.8% in the third quarter. It’s likely to turn out to be worse than that, once we see more accurate estimates. GDP must increase more than about 3% for an entire year to truly lower unemployment rate.)

Even more importantly, the unemployment situation has not been improving much at all. U.S. labor markets cannot be said to have recovered from the "Great Recession" of 2008-2009. As the graph shows, it's true that the official (U3) unemployment rate has edged downward since early 201. At its height, it was at 10% and now it's down to 7.3%. This is still high by most economists' standards.

As anyone who's studied macroeconomic should know, this number misses the fact that a lot of unemployment people can -- and do -- stop being counted as unemployed by the BLS if they stop actively looking for jobs. And that kind of discouragement can hit in a big way if the job market is miserable month after month. The most likely to be discouraged from further job-seeking are the long-term unemployed (which the BLS defines as those who have jobless for a half year or more) was about 4.1 million in October, about 36% of the unemployed. Again, if these folks stop looking for jobs, they're no longer counted as unemployed.

To correct for this effect, I calculated the "gross unemployment rate." It's simply a reflection of the employment/population ratio that labor economists often use to help figure out what’s going one but it's designed to be easy to compare to the official U3 rate. (My ratio is simply 100% minus that e-pop ratio). Note that the one I calculated this time is only for people between the ages of 25 and 54, so it doesn't reflect retirements or college graduation very much if at all.)

The gross unemployment rate mostly moves in step with the official unemployment rate. This is seen most dramatically during the Great Recession (the gray stripe in the graph). But in its stagnant aftermath, notice that my gross unemployment rate has generally stayed high, being about 24% in 2013. The improvements in these numbers occurred in the past, i.e., during 2011 and early 2012.

Notice also that if we look at the gross unemployment rate, the numbers jumped in October. It's only a one month leap, but it reflects the government's temporary shut-down. The fact that it rose much more than the official rate reflects the way that a lot of people have stopped looking for jobs. It’s quite possible that this event will continue to keep the growth of GDP slow. Of course, it could just be a one-time event that will be reversed.  -- Jim Devine

Saturday, November 9, 2013

Last Call: The Unconventional PetroleuMLM Pyramid

Robert Litterman, a former partner at Goldman Sachs and co-developer of the Black-Litterman Portfolio Allocation Model, argued this week that divestment from fossil fuel companies makes economic sense:
It is well known that emissions markets have not yet priced climate risk appropriately, but what is not well understood is that today’s equity markets build in expectations that climate risk will not be priced rationally for a very long time. The market expects a slow increase in emissions prices over the next several decades. But what the market does not yet realize is that this expectation, sometimes referred to as the “slow policy ramp,” is irrational — it does not appropriately take risk into account.
Back in March, Marc Lee and Brock Ellis of the Canadian Centre for Policy Alternatives presented a similar, much more detailed analysis of the financial risk of stranded assets arising from "irrational" pricing of carbon emissions that ignores climate reality.

Update: At New Scientist, Jeremy Leggett agrees "An oil crash is on its way and we should be ready":

It is because of the sheer prevalence of risk blindness, overlain with the pervasiveness of oil dependency in modern economies, that I conclude system collapse is probably inevitable within a few years.
So much for "rational expectations"?

Perhaps. But as I reflect on Canadian government policy promoting pipelines and tar sands development and industry hype about tight oil and shale gas I get another impression: fraud. Equity markets are not merely failing to build in expectations about climate risk; they are being gamed. They are being gamed by policy manipulation at the highest levels. The unconvential "carbon bubble," as Lee and Ellis call it, is not just a bubble but is THE bubble -- successor to the housing bubble that was the successor to the bubble. It is a policy-induced pyramid, a Ponzi scheme and a multi-level marketing scam all rolled up into one.

The "last call" in a tavern is also a marketing opportunity. The customers may even load up on more drinks then they might otherwise order. After all, what the heck, it's... closing time.

and I lift my glass to the Awful Truth
which you can't reveal to the Ears of Youth
except to say it isn't worth a dime
And the whole damn place goes crazy twice
and it's once for the devil and once for Christ
but the Boss don't like these dizzy heights
we're busted in the blinding lights,
busted in the blinding lights

No need for jobs - everything's built!

…Gotta be stopped [this] working! …..  It’s made up by the ruling elite so we’re tired and bored and can’t rebel and or philosophise about our own existence and actually f..g evolve properly…

Says a particularly articulate non-working economist from Australia.  Steve Hughes

Also:  Steve Hughes on the Homeless

Friday, November 8, 2013

Soaring Nominal Wages?

CNN/Money ran a story that makes me what to scream:
Over the last generation, pay for some professions has risen much faster than the overall rate of inflation.
Since they do note consumer prices have increased from 1983 to 2012 (by a factor of 2.31), how hard it would have been for them to express these increases in real terms? I guess it is no surprise that the median wage for doctors have risen over the last 30 years – nominally by 276% but that represents a real increase of only 63%. OK, I have no pity for these impoverished doctors. But when CNN/Money tells us that some professions have seen wages rise by 170% - that’s also in nominal terms and represents only a 17% real increase. I’m glad that hotel clerks and firefighters haven’t suffered real wage erosion like some professions, but stories that tout the allegedly enormous increase in nominal salaries are just stupid.

Sunday, November 3, 2013

The Cooch May Win In VA

As of Friday, the Emerson poll shows Cuccinelli only 2 points behind McAuliffe.  I fear my piece on short term memory may be too real.  A week ago, MacAuliffe would have massively beaten Cuccinelli.  Now the Cooch may win.  He is running ads hard on the failed rollout of the Obamacare exchanges, which has totally dominated the news all week. No more government shutdown by Republican Tea Partiers in the public mind, now it is Obama incompetence, and the Cooch is running it hard.  That ACA will probably get straightened out eventually does not matter.  What matters is the perception right now, and that is not good for the Dems.

I also fear that all those  polls showing Mac so far ahead may induce complacency, while the Cooch's supporters are fired up and have momentum.  This is going to be very close in the end.

Oh, and of course this trend means that in the AG race Obenshain is probably well in the lead now, although I have seen no polls in the last few days on that one.  Heck, Jackson might even pull through, although that still seems unlikely.

Tuesday, October 29, 2013

Who Is A RINO?

The quick answer is that the real RINOs (Republicans In Name Only) are those accusing others of being RINOs, with those doing so doing so very loudly and repeatedly, much the way they make most of their half-baked to outright wrong arguments.  But I want to get into this a bit more based on sitting where I am sitting in Harrisonburg, VA, the home of the only VA GOP statewide candidate with a chance of winning this year, Mark Obenshain, their candidate for Attorney-General, 3 points behind Dem Mark Herring in the latest WaPo poll, within the error of margin, and as I argued earlier with a good chance to win with such a margin a week from today, given the higher energy of the teabag faction, although he is has greater acceptability to moderate Republicans and independents that gives him the chance to win, even though he is essentially as conservative as Governor candidate Cuccinelli.

So, besides that detail, why is where I am sitting so important in understanding this?  Because the older around here of those who shout about RINOs were themselves previously Democrats, over 40 years ago when the Byrd Machine was Democratic, the political machine that led the massive resistance to racial school integration in the 1950s in Virginia.  And what has that to do with Harrisonburg?  The local newspaper, the very conservative Daily News-Record, is owned by the Byrd family, with the dean of the family, former Senator Harry F. Byrd, Jr. recently dying at age 98.  It turns out that he was the personal overseer of the massive resistance campaign for his father, who then ran the machine.  On his death, the local paper spent pages and pages listing his achievements, and he had some genuine ones and was a notable example of the Old School Virginia Gentleman who had many virtues.  But a love of racial equality was not among them, and many noted how the local paper barely mentioned this awkward piece of his past.

As it was, the point got further hammered in when I was at a recent forum about the election, which was attended by both the city GOP chairman (who lives across the street from me) and the local Tea Party Chair, whom I had not previously met. After expressing various wacko views and her full support of truly wacko GOP LG candidate, E.W. Jackson, she bragged about how she used to be a Democrat.  When did she switch?  Oh, around 1970, about the same time the whole Byrd machine switched to the GOP.  This pointedly reminded me that these people are only skin deep Republicans.

So, who are the real Republicans?  As a former Republican I am painfully aware of making the opposite switch and for roughly the same reason but in reverse.  What fundamentally attracted the Byrd machine Dems to the GOP was the national Dems coming out for national civil rights laws, with the GOP after Goldwater opposing them.  I was a pro-civil rights Republican.

As it is this history also  plays out in my local area, the Shenandoah Valley.  It was a part of Virginia historically with little slavery and many groups such as pacifist Mennonites who opposed slavery.  If Stonewall Jackson's army had not been sitting here in 1863, much of the valley, including probably the part Harrisonburg is in, might well have voted to secede from Virginia and become part of West Virginia. Personally I am glad that did not happen, but the fact of the matter is that there were many Republicans here, "Mountain Valley Republicans," who opposed slavery and supported Abraham Lincoln.  These were the real Republicans, and during the long rule of racist Democrats such as those in the Byrd machine, it was this part of the state where the Republican Party hung on and would occasionally manage to elect people to the state legislature.  These real Mountain Valley Republicans were moderate to liberal or progressive in their outlook, generally speaking, and anti-racist.

Unsurprisingly, since the Byrd machine switch, there has been a long campaign and effort by the right wing of the VA GOP to purge and eliminate the remnants of this faction of the party, including especially in their old home base out here in the Shenandoah Valley.  Ironically, one of the leaders of that movement over a long period was Mark Obenshain's late father, Richard Obenshain, who served as state Chairman, but died in a plane crash after having defeated moderate GOP former Senator John Warner for the nomination for that seat in a convention, Warner being a prime example of the Mountain Valley type, even though he was from Northern Virginia, and who was appointed to replace Obenshain after his death as the GOP Senate candidate.  Now, Mark Obenshain looks moderate by comparison to his running mates, but he is no Mountain Valley Republican.

Indeed, the breed is nearly extinct.  There are very few in the House of Delegates, and there may be just one left in the State Senate, although even a few years ago there were several.  But they have been Tea Party primaried intensively, often with this battle cry that they are "RINOs" echoing in their ears.  And the battle is on against the one left.  He is Sen. Emmet W. Hanger, Jr., who represents the district just southwest of here in the valley, Augusta County, with Mark Obenshain my district's senator.  Hanger has been frequently primaried in the past and has so far managed to hang on, the last of the Mountain Valley real Republicans in the evenly-divided-on-party-lines VA State Senate.

Why is the battle now fiercer than ever, to the point of receiving attention in the national media and blogs?  He is heading a panel that must pass on whether or not Virginia will extend Medicaid coverage as part of the Affordable Care Act.  He has reportedly been open to doing so, showing his progressive Mountain Valley roots, and instigating outrage among the teabaggers and others.  As reported nationally, outside money is flowing in from various right wing sources, and he has been hounded by hired demonstrators in his own district over this issue.  They want blood, and in particular, the blood of Emmet Hanger.  I hope that he not only makes the best decision for Virginia on the Medicaid expansion issue, but that he is able to hang in there as the last of the real Mountain Valley Republicans against this onslaught by this mob of hypocritical phonies.

Barkley Rosser

Still Confused About Inflation after All These Years

Woe to the economics profession, or at least the more responsible parts of it, which for decades has tried to explain the income-expenditure identity to any journalists willing to listen.  Every transaction has a buying side and a selling side; one person’s spending is another person’s income, and the sum of all the spending is the sum of all the income.  This needs to be adjusted for transactions that spill over national (and therefore accounting) borders, but otherwise it’s just an identity.

The immediate implication for inflation is that it makes no sense to wonder whether incomes will keep up with inflation.  Here are two ways to think about it, which of course are different versions of the same way.  First, the sum of spending is equally the sum of income.  If nominal spending rises by x% because of inflation, then nominal income does too.  Second, inflation is the average increase in prices, and wages are prices.  Naturally inflation can be accompanied by income redistribution, with some people coming out ahead and others behind, but there is no a priori reason why any particular group should benefit, or even why there should be any correlation between which group benefits in one period and which in another.

Journalists are supposed to know this by now.

But then we see pieces like today’s today’s New York Times/Economix post by Binyamin Appelbaum, and it’s right back to square one, or maybe one-and-a-half.  Granted, there is a paragraph of enlightenment:
To be clear, inflation by definition increases total income. Someone ends up holding the new money. The question is about distribution: Are workers able to secure the raises necessary to keep pace with inflation, or does the extra money simply pad profits?
Other than this, though, it’s all confusion.  Appelbaum keeps referring to wages as “income” and wonders whether income will keep up with prices.  He also throws out comments like
If the Fed drives up inflation, prices would rise first. Even if wages follow, the very people who most need help would feel the short-term pain most acutely. It would feel something like a temporary national sales tax.
Earth to Appelbaum: wages are prices.

Of course, the relationship between price inflation and nominal wage increases is a purely empirical matter, so let’s consult with uncle FRED:

The blue line is the quarterly year-on-year percentage change in the consumer price index (CPI); the red line is the corresponding year-on-year change in nominal hourly compensation.  As you can see, they move largely in tandem.  A few specifics:

At first, the Volcker disinflation of 1979-82 had little effect on nominal wages; after a couple of years both plunged together, with the decline in prices somewhat outpacing the fall in wages.

There was an extended period in the latter 1990s during which real wages (wage growth minus inflation) rose.  This was due to the low unemployment of the Clinton boom; inflation during this period was unchanged.

Other than this, the relationship is mostly a wash.

If the public, as Appelbaum quotes Shiller as saying, is misinformed about the relationship between inflation and wages, it’s the responsibility of the press to set them straight.  You don’t do that by musing on whether incomes can keep up with prices or, as he does toward the end, whether global labor market conditions will cause inflation to “punish” workers.

The big distributional effect from unanticipated changes in inflation has been and always will be between net lenders and net creditors, and it is useful to explore who these people are and how big the impacts on them are likely to be.  It is also true that even anticipated inflation can affect financial flows if contracts are fixed in nominal terms over long enough time periods, as in some defined benefit pensions.  But wages?  There is neither a theoretical nor an empirical reason to think much of anything.

Now here is the real problem beneath the problem.  Net creditors, which means those sitting on a pile of financial assets whose value depends on real interest rates, suffer a one-off loss every time expected inflation goes up.  If the Fed decides to boost its target, that loss will be substantial, like a one-time tax of all credit market holdings of 1-2 percent.  If the runup in prices exceeds the target, which of course it could, the loss is that much greater.  We are talking about a very large sum of money, and it is perfectly rational for the high net worth crowd to try to avoid it.  One practical strategy is to pay or otherwise reward pundits, reporters and even economists who sew confusion.  Spread the rumor that prices are one thing and wages are another.  Repeat the mantra that “inflation is the cruelest tax of all”.  Fill economics textbooks with endless pages about whether households fail to see that nominal wage increases are offset by consumption prices but nothing about whether they understand that consumption prices are offset by nominal wage increases.  (You know: inflation is bad because I have to pay more, but my wage went up because my employer knows how valuable I truly am.)

We live in a sea of deliberate misinformation about the effects of inflation.  Journalism should be the rock that stands up against the waves, not the waves beating down on the rock.

Greg Mankiw and Lisa Myers on the Tale About People Losing Their Health Insurance

Greg Mankiw lectures the advisors for President Obama on the latest controversy surrounding the Affordable Care Act:
As someone who has previously worked for a President, I am fascinated by how the White House staff let the President so consistently and so publicly make a false statement. Presidential speeches undergo a painstakingly thorough review process.
I’ll skip the obvious retort about how the President that Greg worked for told the American people a lot of lies and simply note that Greg’s source was Lisa Myers. Rather than getting into the specifics, let me turn this one over to Josh Marshall:
It's been a long time since I've seen someone bend over quite so far backwards to mislead people about what's contained in a story. But it is Lisa Myers. So I guess we shouldn't be surprised? We were just discussing this amongst our ed staff: it's true that the White House did oversell how little change there would be in the individual insurance market. But saying that millions of people are getting 'cancellation notices' or 'losing their coverage' is deeply misleading.

Monday, October 28, 2013

The Economist on the Inflation Tax

Greg Mankiw has a problem with one aspect of something in this discussion:
Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.
Greg’s comment is simply this:
Answer: The second number is inconsistent with the first. Note that .98^35=.49, so we get only a 51 percent cumulative loss. In fact, the price level from 1946 to 1981 rose by a factor of about 5, so holding currency with a zero nominal return led to a real loss of only about 80 percent.
Interest rates on Treasury bonds reflect the expected inflation rate at the time a person purchases the bond plus the real interest rate at the time. Treasury bonds in 1946 were generally around 2.5% so if actual inflation over the period that the person held the bond exceeded expected inflation, then ex post real rates would be lower that the real rate expected when the person purchased the bond. But eventually the bond matures and the person is free to renegotiate based on market conditions and the expected inflation rate when purchases new bonds. So was The Economist referring to 10-year Treasuries or 30-year Treasuries? Simply put – it is not inflation but unexpected inflation that leads to the type of losses described in this discussion. To fair, the discussion later admits:
The answer to that conundrum may be that default happens suddenly, whereas inflation and depreciation are slower, giving investors more time to adjust by demanding higher interest rates to compensate for their losses. This is particularly true in the case of short-term debt, such as Treasury bills; inflation is unlikely to do serious damage to a portfolio in the course of a few months.
Alas, the discussion goes off track in my view with:
But by buying bonds in the name of “quantitative easing”, central banks are influencing interest rates of all maturities these days. By holding down bond yields, the authorities are employing a policy some have dubbed “financial repression”, in which real returns on government debt are reduced. The idea is to make investors buy riskier assets, such as equities and corporate bonds. In effect, the bond vigilantes have been neutered.
Doesn’t financial repression suggest that interest rates are low because the Federal Reserve has suppressed market forces creating a difference between the market demand for government debt and its supply? One would think the real story is the incredibly weak state of the overall economy has been the driving factor in keeping real interest rates so low.

Sunday, October 27, 2013

Accelerating Inflation?

Today (October 27, 2013), the New York Times has an excellent page 1 story by Binyamin Applebaum indicating that more and more economists favor the encouragement of inflation as a way to fight the persistent stagnation that the U.S. economy has been suffering from since the Big Financial Flop of 2008 and the resulting Great Recession.  As Paul Krugman notes in his blog, this policy is what he's been advocating for awhile. This pro-inflation company includes even Kenneth Rogoff, the Chicken Little of government debt.

One argument against this view is that of economists who "warn that the Fed could lose control of price as the economy recovers." The idea is that inflation will accelerate (speed up) in a way that gets us back to the conditions that the U.S. last saw during the 1970s.The problem with this "Back to the 1970s" perspective is a key fact that was left out of the news story.

What's left out is the fact that the official (U3) unemployment rate is currently at 7.2%, which is significantly higher than almost all estimates of the inflation-barrier unemployment rate, also known as the NAIRU. (The initials stand for the Non-Accelerating Inflation Rate of Unemployment. This rate is known to ignorami as the "natural" rate of unemployment.) Worse, the ratio of paid employment to the potentially working population has stayed distressingly low since the Great Recession (even when corrected for the population's changing age profile). It's true that the official unemployment rate has edged downward, but this is largely an illusion: as unemployed people stop looking for jobs (discouraged by the bad job situation), the statisticians count them as having dropped out of the labor force and therefore as no longer unemployed. If all of those workers who left the labor force were counted as "unemployed," the unemployment rate would be much higher. Heidi Shierholz of the Economic Policy Institute has shown this by looking at real-world data.

Anyway, the point is that the NAIRU concept cuts both ways. In happier times, conservative economists could point to this minimum and use it to argue against people who want full employment. They'd say that "we can't go there because there be monsters," where of course the monsters are worsening inflation rates. If the Fed encourages inflation, people will begin to expect inflation and will act to protect the real purchasing power of their incomes (or to buy now, before prices go up). This means that inflation becomes built into the economy's normal behavior. If the unemployment rate stays below the NAIRU, the inflation gets worse and worse.

But nowadays, the U.S. economy has unemployment significantly above this threshold. In the current situation, the inflation rate should be falling and it is doing that, as Appelbaum's graph shows. Except for the usual barriers against cutting wages and prices (some of which were mentioned in the article), it could easily become negative, so that we would see deflation (as actually seen in Japan). People would expect falling prices, which would then lead to behavior that causes prices to fall further. In this case, we would see a vicious cycle that encourages depression.

That is, the "Back to the 1970s" scenario might have applied in 2006, when the job situation was significantly better, but it cannot apply now. Any inflationary surge that the Federal Reserve and the federal government engineer would be canceling out the current deflationary tendency. It wouldn't actually cause rising inflation.

Putting it a different way, those who are always shouting "inflation!"  are assuming that the economy is operating at the NAIRU, or what used to be called the "inflation barrier" or full employment.

The 64 thousand ruble question -- also not addressed by Appelbaum -- is how the Fed and the federal government are ever going to cause an inflationary surge. The Fed's stimulus as mostly created a lot of excess reserves in the banks' coffers rather than stimulating the economy and the inflation rate. The federal government has been going in the opposite direction, joining most of the state and local governments to encourage deflation.  -- Jim Devine